Ethereum Merge a Factor in ETH’s Deflationary Turn

Rising NFT trading volumes have contributed a great deal to the switch, according to Blockworks Research

article-image

WindAwake/Shutterstock.com modified by Blockworks

share

Ethereum’s native token, ether, has turned deflationary. Again.

What’s driving the latest shift is a combination of factors, according to Blockworks Research analysts, previous reporting and crypto data providers. Among them:

  • NFT trading volumes picking up steam since the start of 2023 after a period of depressed activity. The result has been rising gas fees, which power transactions on the Ethereum network. That increase, in turn, has triggered “subsequent base fee burn” for traders, Blockworks Research analysts said. (Base fees set a floor for gas and are burnt, or removed from circulation, to control the availability of ether on the market.) 
  • Lingering effects from the Merge, which transitioned the network from proof-of-work to proof-of-stake. A Blockworks Research report said the move was “undeniable” in terms of “the impact [proof-of-stake] has had on Ethereum’s supply.”
  • Ethereum’s pending Shanghai upgrade, which is set to allow stakers that validate the blockchain’s transactions to withdraw their locked-up ether for the first time. 
  • Ramped-up volatility in terms of trading ether, which has an impact on the native token’s overall supply. And bullish headwinds to start the year for bitcoin, ether and additional cryptoassets. 

Ether (ETH) was trading around $1,600 as of Tuesday afternoon in New York, holding relatively flat on the day. That’s significantly up from the start of the year, when ether was trading in the $1,200 range. 

The cryptoasset — which has typically been inflationary — took a deflationary turn in November 2022 for the first time since the Merge. It previously had become deflationary in November 2021 and has flip-flopped at least three times this month.  

“I strongly believe total ETH burn in the next cycle will be at least as great as the previous cycle,” said Dan Smith, a senior analyst with Blockworks Research. 

Ethereum has about 18 times more TVL (total value locked) than most layer-2 blockchains, according to Smith, which are “barely even [layer-2s] in their current state.” Ether now has a peak burn rate of -2.8% compared to its last bull run, he said, based on an analysis of on-chain data from Oct. 26, 2022 to Jan. 24, 2023.

READ MORE: The effect of Ethereum’s “security budget” on its inflation status

NFT marketplaces OpenSea and Blur have burned more than 6,500 ETH over the past month, contributing significantly to the inflation versus deflation narrative, per Blockworks Research. 

Added Smith: “While layer-2s showed continued innovation and adoption in 2022, they lack decentralization in their current state.”

Decentralizing elements such as sequencers or provers will come later in 2023 or 2024, developers say.


Get the news in your inbox. Explore Blockworks newsletters:

Tags

Decoding crypto and the markets. Daily, with Byron Gilliam.

Upcoming Events

Javits Center North | 445 11th Ave

Tues - Thurs, March 24 - 26, 2026

Blockworks’ Digital Asset Summit (DAS) will feature conversations between the builders, allocators, and legislators who will shape the trajectory of the digital asset ecosystem in the US and abroad.

Old Billingsgate

Mon - Wed, October 13 - 15, 2025

Blockworks’ Digital Asset Summit (DAS) will feature conversations between the builders, allocators, and legislators who will shape the trajectory of the digital asset ecosystem in the US and abroad.

recent research

Unlocked by Template (1).jpg

Research

As AI supercharges surveillance, privacy becomes a prerequisite and the winning stack will combine confidentiality with selective disclosure. Zcash’s Tachyon, composable standards on Ethereum/Solana, and compliance-aware pools aim to make private rails the new norm.

article-image

Bain Capital Crypto and Haun Ventures co-led the round as demand grows for Bitcoin-denominated savings and annuities

by Blockworks /
article-image

NYSE owner’s investment values the prediction market at $8–9 billion, signaling Wall Street’s entry into event-based trading

by Blockworks /
article-image

Pineapple begins deploying its $100 million Injective Digital Asset Treasury, staking INJ to earn yield and fund onchain mortgage ambitions

by Blockworks /
article-image

Staking levels in the ether funds will depend on protocol unstaking queue times and anticipated redemption activity, firm says

article-image

ETF inflows, miner strength, and tightening supply drive Bitcoin past its prior peak amid renewed demand for scarce assets

by Blockworks /
article-image

The Guidestar team, led by Alex Nezlobin, will join Uniswap Labs to enhance automated market maker design and smart order routing

by Blockworks /